Tuesday, May 1, 2012

The investment arms of Wells Fargo, Citigroup, Morgan Stanley and UBS were each fined for selling complex exchange-traded funds to customers without enough supervision and training, the Financial Industry Regulatory Authority announced Tuesday.

FINRA is a private company that polices brokerages and exchanges. None of the banks challenged the findings, nor did they admit wrongdoing.

Wells Fargo was fined $2.1 million and must pay $641,489 in restitution, the largest penalty of the four banks.Exchange-traded funds, commonly known as ETFs, are traded like stocks and are designed to provide returns that track a benchmark or index.

The four banks sold more complex products called leveraged ETFs -- which use debt to multiply returns -- and inverse ETFs, which are profitable if the underlying index falls.

FINRA found that employees sold billions of dollars in these funds without adequate knowledge of their structure or risks, and sold some risky funds to investors who wanted a conservative investing profile.

"The added complexity of leveraged and inverse exchange-traded products makes it essential that brokerage firms have an adequate understanding of the products and sufficiently train their sales force before the products are offered to retail customers," FINRA enforcement chief Brad Bennett said in a statement. "Firms must conduct reasonable due diligence and ensure that their representatives have an understanding of these products."

Wells Fargo said similar problems affected customers at a number of firms as non-traditional ETFs became more popular at a volatile time in the markets.

"Wells Fargo Advisors cooperated fully with FINRA throughout this matter and is pleased to have reached this settlement," the bank said in a statement. "Wells Fargo Advisors has enhanced its policies and procedures and is confident that it has appropriate supervisory processes and training to meet our regulatory responsibilities and clients’ investment needs."